June 13, 2018
Guest blog post by Edgar L. W. Morgenroth, professor of Economics at Dublin City University.
A key advantage of EU membership is the internal market of the EU, which allows traders to trade goods and services with minimal barriers. While the impact of Brexit on the nature and extent of trade barriers will depend on the final agreement between the EU and the UK, Brexit will leave trade between the UK and the EU less free.
Trade barriers can take many forms. For merchandise trade tariffs or tariff quotas are applied by the EU to a range of products from third countries. While the average tariff charged by the EU is relatively low at around less than 5%, there is significant variation with the highest tariffs being charged on agri-food products, followed by basic manufactured goods including textiles. For example, fresh mackerel is subject to a 20% tariff. In many cases tariffs involve both a tariff rate and a charge based on the weight or volume of the products shipped. For example, fresh beef is subject to a 12.8% tariff plus €303.4 per 100 kg of beef. In some cases the tariff increases once a quota of product has been reached.
The variation of tariffs across different products implies that the effect of tariff barriers will be very different across sectors and the severity of the impact will also depend on trade patterns. For example, the UK is the most important destination for Irish beef exports while it is much less important as destination of Irish pharmaceutical products.
A worst case scenario for Brexit, for example if no final agreement between the EU and the UK is reached, would entail the imposition of these tariffs on imports from the UK into the EU. This would most likely be reciprocated by the UK. Static simulations, where it is assumed that the effect of tariffs is passed through to final prices and where no allowance is made for trade diversion to other countries, suggest that this would reduce Irish goods exports to the UK by 30.5%, which equates to 4.2% of total goods exports. Total UK merchandise exports would be reduced by 9.8% under these assumptions, while the effect for the EU as a whole would be to reduce exports by 2.1%. This shows that the impact of a hard Brexit would be very significant for the UK and for Ireland the effect would be double of that experienced on average by EU countries.
In addition to tariff barriers, trade is also affected by non-tariff barriers. These have featured less in discussions about the impact of Brexit, but in practice tend to be larger and are likely to be more important as they might apply even in a situation where trade between the EU and the UK is free of tariffs, and could affect Irish trade with other countries.
Non-tariff barriers can take many different forms. For example, a country may set technical standards that differ from those that apply in the exporting country, thereby requiring the exporter to make alterations to the product. A country may require expensive certification, registration or treatment of a product before it is allowed to enter the market. There may be government procurement restrictions or subsidies for local producers. Administrative or inspection procedures may also result in additional costs. These may also affect transiting trade, which is important for Ireland as more than half of the goods exported from Ireland to countries other than the UK transit through the UK. Importantly, given the many ways in which trade can be affected by non-tariff barriers makes it more difficult to remove these barriers via trade agreements.
While tariffs and non-tariff barriers are important for goods trade, services trade tends to be more restricted. Even a far-reaching trade agreement, such as the recent Canada EU Trade Agreement (CETA) removes almost all tariff barriers for goods but retains many restrictions for services and in particular financial services. For example under CETA Canadian insurance companies are required to set up local branches in member states in order to supply the service services in the EU. Other types of restrictions also apply. For example, airlines operating within the EU must be majority owned by EU shareholders.
The economic impact of Brexit will be significantly determined by the nature and extent of trade restrictions post-Brexit. This is not just dependent on whether tariffs are imposed, but will depend significantly on the degree to which non-tariff barriers and trade restrictions will apply. The potential impact of a hard Brexit could be significant at least over the short-run, and will not be restricted to reduced exports to the UK but also due to the potential of raised costs for imports from the UK. Irish trade with other countries may also be affected by non-tariff barriers that may apply to goods that are transhipped through the UK, reflecting the fact that this is the shortest route to the economic heart of Europe. Getting an agreement with the UK on this aspect of trade is therefore particularly important.
This piece was first published on the blog of the DCU Brexit Institute.